Bing/Yahoo and Windows Mobile 6.5, though, are suffering in terms of market share. Both share a common problem -- Google. (Source: MobileTech World)

Windows 7 is the best-selling OS in history, so why aren't investors taking note? Look to the mobile and search businesses...

Following
its perennial rival Apple's announcement of a terrific
quarter, Microsoft had some good news of its own. At 5:30
p.m. E.D.T. Thursday evening, Frank Brod, Microsoft's chief
accounting officer, and Bill Koefoed, general manager of Investor
Relations at Microsoft, announced earning
information for Microsoft's quarter ending March 31.

The news
was impressive. Microsoft's fiscal third-quarter revenue
totaled $14.50B USD, up 6 percent from the same quarter a year ago.
Factoring in the deferral of $305 million of revenue relating to
the Microsoft Office 2010 Technology Guarantee program, the revenue
totaled $14.81B USD, a rise of 8 percent.

Operating income,
net income and diluted earnings per share were $5.17 billion,
$4.01 billion and $0.45 per share, increasing 17 percent, 35 percent,
and 36 percent, respectively, from a year ago.

Those gains
came largely on the back of Windows 7, the fastest
selling operating system in history. Peter Klein,
chief financial officer at Microsoft, comments, "Windows 7
continues to be a growth engine, but we also saw strong growth in
other areas like Bing search, Xbox LIVE and our emerging cloud
services. Our record third-quarter revenue along with continued
rigor on cost management resulted in exceptional EPS
growth."

Kevin
Turner, chief operating officer comments, "Business customers
are beginning to refresh their desktops and the momentum of Windows 7
continues to be strong. We are also seeing tremendous
interest in our market-leading cloud services for business."

Despite
the terrific success, investors aren't showing Microsoft as much love
as one might expect. Microsoft stock actually dropped a bit
over 1 percent in after hours trading. Granted, it rose in the
last couple weeks, but overall it's up just over 25.8 percent since
early October 2009. Apple's stock, by contrast, is up 47.8
percent.

One possible reason for investor's unusual lack of
bullishness is weaknesses in the non-Windows part of Microsoft's
platform. Xbox and Zune business units are performing decently,
but the critical Windows Mobile business has been losing
large chunks of market share.

Microsoft's
Windows Phone 7 OS can't come soon enough, but that product faces
skepticism from smartphone shoppers due to its lack of support
for multi-tasking
and copy-and-paste. Meanwhile, it is likely that
Microsoft's existing smartphone OS, Windows Mobile 6.5, will get
passed by Google's Android OS sometime this quarter. That's a
troublesome sign as more computing jumps to the mobile realm.

In
the internet search business Bing has failed to grow, as
well. According
to market research firm Net Applications, Bing has dropped
from a peak marketshare of 3.52 percent in August to 3.11 percent in
March. Partner Yahoo, whose search is now powered by Bing, has
suffered even more dropping from 7.28 to 5.38 percent over the same
time period. Meanwhile, between July and March, Google jumped
from 78.45 percent to 85.75 percent. Those numbers paint a
rather bleak picture for Microsoft's long-troubled search efforts,
which it has poured money into.

Ironically, both in the mobile
phone and the search markets, Microsoft has the same problem, and
that problem has a name -- Google.

So while the company has
plenty to celebrate, thanks to the storied Windows 7, there won't be
much fanfare in the earnings reports for the languishing smartphone
or search engine business units.

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quote: They have huge amounts of R&D centers across the world and have acquired three to four research firms pretty much every single year.

R&D centers that produces a series of interesting demos that never seem to make it into being viable products. Read the MS employee blogs such as http://minimsft.blogspot.com/ where the MS guys and girls are pulling their hair out at how useless the MS RD spend is in terms of generating actual new profitable products.

quote: This means they have the ability to make a very complex product very quickly. Don't believe me look at Windows 7 or office 2010.

These are not new products emerging from R&D - they are evolving existing products and ones that are almost certainly dominating markets that will shrink in the future. Plus it took how long to get from XP to Windows 7 (via the traincrash of Vista)?

quote: As for their monetary stability, Microsoft has so many long term contracts, subscriptions, and brand loyalty that they can comfortably coast for years without much innovation- much like IBM.

Thats true to some extent but MS are in markets that are under pressure - desktop is probably in for a long secular slow decline and the server/Office side of the business will probably come under intense price pressure from the likes of Google sooner rather than later. And who can claim that coasting is success!

quote: But what is truly amazing is that Microsoft isn't just milking long term money, they are setting up a stable platform for the next 25 years. Sure Google dominates in search right now, but who will have four times as many internet users in just 15 years? China. And who is going to have all that nice market share since Google left? Let's not even mention Bing's growth in India.

Microsoft Online Services Division just lost $711 million in the first three months of this year. That's a jaw-dropping $2.8 billion loss annual run rate. This follows years of significant loss. This is the triumph that will save the company?

quote: As for the mobile sphere, Microsoft isn't targeting Apple. Their primary focus is on RIM. Apple will have to face android and I doubt Apple will win that fight. And unlike Apple, Microsoft actually plays nice with other companies like Adobe, which means the market players are much more willing to support Microsoft than RIM or Apple.

This is actually pretty amusing - let's remind ourselves that MS haven't actually released anything in the smart mobile space as yet except the execrable mobile 6.5 so talking about it beating anyone is I feel a trifle premature. The punchline is the statement that MS knows how to play nice with other companies - was that some sort of surrealistic joke?

quote: Finally the gaming sphere is always growing. Xbox live cannot be doubted at this point. With a new Xbox due sometime in 2012 and Natal in 2010, Microsoft is maintaining a lead that will eventually reach 50-75 million Xbox live subscribers.

But MS are still not actually making any significant profits from Xbox after pouring billions of dollars of investment in to the project. If this was a standalone business and not a giant hobby financed by the Windows/Office monopoly profits it would have gone bust a long time ago.

The sad and embarrassing truth of MS's predicament is that after a decade and half of intense effort the company has failed to find a single new area of activity or new product line that can generate significant profits and that's with their vast cash resources, their domination of the corporate IT sector, their windows/Office desktop monopoly and their previous (but rapidly eroding) browser domination. To not be able to innovate and develop new profitable business with such advantages is a shameful indictment of the company and its management.

"Nowadays, security guys break the Mac every single day. Every single day, they come out with a total exploit, your machine can be taken over totally. I dare anybody to do that once a month on the Windows machine." -- Bill Gates